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Monday, December 19, 2011

Doctor (er, wait, SEC), Heal Thyself

But first, let's look at the government's last big, public SEC investigation...

Most will remember the Bernie Madoff scandal: a ponzi scheme involving some $50 billion USD. While the end result was Madoff's conviction the there is a long and interesting history of the SEC ignoring the Madoff problems (see this at PBS.org).

Most interesting is that, about ten years before Madoff's initial confession to his sons, Frank Casey, a Boston investment guy had heard about Madoff's supposed decades of investing success making 18% a year. So Casey asks his colleague Harry Markopolos to "reverse engineer" some information Madoff gave on his trading strategies. After a few hours Markopolos comes back and tells Casey what's being reported by Madoff is impossible and says "Frank, this is a Ponzi scheme."

About a year later Casey submits an 8-page report to the Boston SEC office.

Nothing happens.

Another, longer memo outlining Madoff's Ponzi scheme is submitted to the SEC with Harry Markopolos's conclusions in 2005 reaching the same conclusions.

Nothing happens.

After Madoff's downfall the SEC investigates itself (see this link). Reading this you'll find this interesting tidbit on page 2 "...including examining the role that former SEC Assistant Director Eric
Swanson (Swanson), who eventually married Madoff’s niece, Shana Madoff
(Shana), may have played in the examination or other work conducted by
the SEC with respect to Madoff or related entities, and whether such
role or such relationship in any way affected the manner in which the
SEC conducted its regulatory oversight of Madoff and any related
entities." (Underline mine.)

On page 23 we see, after a review of almost two decades of issues with Madoff including an SEC investigation in the early 90's and a series of written and email "tips" that Madoff is running a ponzi scheme, that little is done regarding this information: "During the course of both these examinations, the examination teams discovered suspicious information and evidence and caught Madoff in contradictions and inconsistencies. However, they [ the SEC investigators ] either disregarded these concerns or simply asked Madoff about them. Even when Madoff’s answers were seemingly implausible, the SEC examiners accepted them at face value." (Underline and bold mine.)

Had you mentioned to your neighbor that you made an extra $10,000 USD in the stock market on a "tip from your brother-in-law" no doubt the black helicopters and SWAT teams would be on you in a minute and you'd have a federal criminal record like poor Mr. Lawrence Lewis who I wrote about in this post.

The consequences of the Madoff scandal rendered many widows and orphans destitute.

As for the SEC staff including Madoff's relatives - not so much - slaps on the wrist, a few lost jobs, not much more really... at least with relative to the damage the Ponzi scheme cost everyone else.

So now its Freddy and Fanny's turn.

Let's look at the information available to the SEC prior to 2011.

Here is a video montage of various congressional investigations from around 2004 where the same kind of "red flags" as raised by Frank Casey and Harry Markopolos are broadcast on TV.

While partisan politics is obviously an element here, as perhaps is race, the fact remains that the financial standards for how Freddy and Fanny were conducting their business were lax to the tune of many tens or hundreds of billions of dollars.

Again, no one at the SEC apparently paid any attention to this.

Now, long after the horses are out of the barn, according to the WSJ the SEC brings charges against a couple of Freddy and Fanny execs: "[ the SEC ]... brought civil fraud charges against six former executives at the two firms, including former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron."

But, we learn from the same article, that "Before the SEC announced the charges, it reached an agreement not to charge Fannie and Freddie."

Interesting, "... reached an agreement not to charge Fannie and Freddie ..."

The government investigating itself.

No charges against itself.

Only the citizens running the agency...

And, according to the article, its unlikely these execs will face criminal charges.

Hmmmm...

Seems like there is a problem here, not only with the SEC, but with the whole notion of one government agency investigating another.

Where's the oversight?

In Congress, another government agency?

(Why in this WSJ article we learn that Congress and Senate members, as well as their staff, are exempt from insider trading laws and that, on average, their stock investments return an "astonishing" 12% per year...)

I doubt we'll see much in the way of an investigation from Congress or the Senate...

Our country is sick.

Its rotted from the inside out and these two stories tell you why.

The government folks investigating other government folks know how important a government pension is (as well as benefits) so you can bet your bottom dollar that no matter how bad things get (perhaps even with murder as in the "Fast and Furious" problems the ATF has) no one is going to be seriously punished.

About the worst it gets is someone loses their job.

Why are there no "Occupiers" out front at the SEC? After all between the SEC and Freddie and Fannie we're looking at hundreds of billions of mismanaged funds... Oh, but I guess that since its the government no greed was involved there's no need to protest...

Lions and Tigers and Bears!

Oh my...

(BTW, the WSJ does a good job of reporting on all of this but a poor one in the editorial department of connecting the all the dots... I think that the entire financial investigation and investment system of the US government has a serious problem and something should be done about it.)